The Gilmo Report

March 29, 2017

March 29, 2017

The bearish look of the major market indexes over the weekend came to sudden fruition Monday morning. With the futures down big on Sunday evening, investors were treated to another manic Monday as the indexes gapped down hard right at the bell.

This breakdown, however, came after both the S&P 500 and the Dow Jones Industrials Indexes had already been in downtrends for all of March. Media pundits were lamenting the eight-day decline in the Dow over the weekend, noting that it was “the worst losing streak in six years.”

Of course, this eight-day losing streak was only seen in the Dow, because the S&P 500 was in fact down seven out of eight days in a row. As the headline index, the Dow gets perhaps more press than it deserves. In any case, the gap-down on Monday had an exhaustive flavor to it. When sellers failed to show up in force, the indexes did what comes naturally and simply rallied off their 50-day moving averages.

Today the index was able to close just above the declining 10-day moving average with volume drying up. It has yet to convincingly clear resistance along the prior March lows. So far this could be seen as a simple reaction bounce, but at this point the 10-day line now serves as a reference point for near-term support.

 

GR032917-$SPX

 

The NASDAQ Composite Index has been in a better position than its NYSE-based brethren, and gapped down to a point just above its 50-day moving average on Monday. It then turned and bounced higher from there. Yesterday the index regained its 10-day moving average on higher trading volume.

Inertia took the index higher today as volume declined slightly. It is now within spitting distance of its all-time intraday highs posted two Tuesday’s ago. While the index action is choppy on its face, the critical factor is what individual stocks are doing, as usual.

 

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Most of the best entry opportunities occurred on Monday morning as many stocks pulled into areas of support. One outlier was of course Snap (SNAP), which gapped up on Monday, pulled back to unchanged, and then ran up through the 24 price level. That turned out to be a very nice move following last week’s Wyckoffian Retest and Wyckoffian Spring, otherwise known as an undercut & rally long set-up. If one bought the stock on the retest the move was better than 20% in four days as the stock cleared the 24 price level on Monday.

Buying at the 20.64 U&R buy point would have yielded about 18% as measured from Monday’s intraday high of 24.40. Of course, it is blatantly unrealistic to assume that everyone sold right there, but getting 15% out of this in four days is pretty good for this market, and is a move I will tend to sell into, looking to re-enter on a pullback.

That pullback came today when SNAP tested its 10-day moving average, a logical area of potential support on any pullback off the highs. The stock held support and turned back to the upside on lighter volume as sellers backed off. The stock could still be considered to be within buying range of the 10-day line, but my preference would have been to take shares this morning on the pullback to the line.

 

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I must admit that I am often amazed how naïve investors can be at times, especially when it comes to this concept of a “high, tight flag” formation. I get emails or I see tweets where people are babbling about a stock’s pattern qualifying as a high, tight flag. It’s as if they are trying to derive some predictive value by determining that a stock pattern qualifies as this or that.

This is what I was hearing about Applied Optoelectronics (AAOI) on Monday as the stock broke out of a short flag formation and into new-high price territory. The reality is that whatever you wanted to label the chart pattern at that time has zero predictive value. The last buy point for AAOI came on the pullback to the 20-day moving average, something I had already discussed in prior reports.

Some apparently believe that a high, tight flag (or “HTF” as some refer to it) is some magical, mystical chart pattern that leads to automatic, massive upside gains, even after a stock has gone up nearly three times like AAOI has since I first began discussing it in my report when it was around $20 a share late last year. This all strikes me as more of a belief system than an investment methodology.

The bottom line is that anyone looking at AAOI as a buy candidate should have first been doing so about 40 points lower. From there the stock has issued several secondary buy points on the way up, and I’ve discussed those in the report many times. This most recent flag breakout is just another breakout, as far as I’m concerned, and I would not be mortgaging my house and throwing everything into AAOI based on whether it “qualifies” as a high, tight flag.

Frankly, it’s laughable, since an HTF can statistically be shown to have no real predictive value. It might lead to more upside, it might not. Even Bill O’Neil’s first protégé, David Ryan, used to say that Bill should just tear out that particular page in his book where the mythical HTF is discussed. My suggestion is to tear all this HTF stuff right out of your brain, and rely on more specific daily price/volume action to determine entry points. There are no holy grails in the stock market, and if there were, I doubt if the HTF would be one of them anyway.

All that said, AAOI posted a strong flag breakout on Monday, and has since held tight with volume drying up. We can see on the chart below all of the prior buy points. The two buyable gap-ups, which were entirely buyable per our rules for buying BGUs, were probably too extended for standard base-breakout buyers to move into.

 

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Tesla (TSLA) has kept the shorts on the run after last week’s undercut & rally maneuver at the 50-day moving average, an “MAU&R” as I discussed a week or so ago in the report and blog posts at that time. The company gapped higher yesterday on news that Chinese online commerce giant Ten Cent Holdings (TCEHY) had taken a 5% stake.

While the gap-up move came on heavy buying volume, the magnitude of the move was not sufficient for a buyable gap-up (BGU). In addition, TSLA closed in the lower half of its price range, so it does have the look of an island gap. However, an island gap is as an island gap does, and so far, the stock is holding squeaky tight on a nice inside day with volume drying up to -33% below average.

This is a simple trade if one wants to buy the stock here. Simply buy TSLA as close to the 275 low of yesterday’s gap-up range, and then use the bottom of the “rising window” at 270 as a guide for a tight, 2% stop. The shorts are not having a good time here, and I wouldn’t be surprised to see TSLA eventually clear the $300 price level in any continued market rally.

 

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Among the Gilmo bio-tech Three Musketeers, none of which I show here on charts, Clovis Oncology (CLVS) is backing down to its 50-day moving average and prior base breakout point at 62.94 which might present a lower-risk entry opportunity at that point.

Glaukos (GKOS) remains in an extended position, and I would only view pullbacks to the 20-dema at 47.72 as your best lower-risk entry opportunities. Meanwhile, Incyte Pharmaceuticals (INCY) is holding very tight along its 20-dema and just below the line as volume dries up. Technically, this would be a lower-risk entry position here, but I would want to see the stock hold the 137.54 price level and get back above the 20-dema as soon as possible.

The Fourth Musketeer, if there can be such a thing, is Bioverative (BIVV), which I discussed over the weekend. As the other bio-tech Musketeers meander about, it is doing its best to show them up.

On Monday BIVV presented investors with a nice entry opportunity as it first undercut the 20-day moving average and then rallied back above the line. Volume has been light, but that hasn’t kept the stock from drifting higher and back up toward the current base highs. Given that BIVV is now extended I would look for pullbacks to the 10-day moving average at 50.66 as your best lower-risk entry opportunities.

 

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In NASDAQ big-stock land we can see that AMZN broke out today on heavy buying volume. If you are a base breakout buyer then this one is for you, but I tend to think that the stock was best bought on Monday’s pullback to the 50-day moving average. That move turned out to be a low-volume shakeout, setting up today’s breakout to all-time highs on strong buying volume that was 31% above average. For a big-cap name like AMZN, that is a decent volume increase.

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) moved to new highs yesterday after shaking out at its 20-dema on Monday. Volume yesterday came in above average so it is positive. Your best entry here, however, was on Monday’s test of the 20-dema.

Netflix (NFLX) shook out at its 50-day moving average on Monday and has since rallied back up to last week’s highs. Volume has been light on the rally, however, and the only entry point would have been at the 50-day line on Monday.

Facebook (FB) shook out at its 20-day moving average on Monday, and posted a new all-time high today on below-average volume. In my view, the best entry point came on Monday on the pullback to the 20-dema.

Priceline Group (PCLN) posted a pocket pivot at its 10-day moving average yesterday. Technically, this was best bought nearer to the 10-day line as possible, but the stock is still within about 2% of the line so it can be considered to be within buying range.

While most of these big-stock NASDAQ leaders are out of position right here with respect to lower-risk entry positions, Nvidia (NVDA) is actually sitting right in position. Since regaining its 50-day moving average eight trading days ago the stock has tracked nicely along the line as volume dries up sharply.

On Monday, the stock had a nice shakeout through the 20-dema as sellers failed to swarm the stock. I view this as an indication that there probably aren’t many sellers left in the stock here. With short interest up 22% in the most recently reported period, the shorts aren’t getting any love here. In my view NVDA is buyable right here using the 20-dema as a maximum selling guide, or the 50-day line as a tight selling guide. Your choice.

 

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Netease (NTES) is starting to have some problems here as it breaks below its 20-day moving average with volume picking up on the day. Volume did come in below average, but the stock looks set to test the prior 178.80 BGU intraday low of mid-February or the 50-day moving average at 276.08.

Those would be your two reference points for maximum selling guides, but the bottom line is that NTES has failed to go anywhere since its February buyable gap-up move after earnings. Now it is floundering and should be watched for a clean breach of the 50-day line or a possible Ugly Duckling long entry point on such a pullback if it resolves constructively. NTES has been on the fence over the past few days, and right now it has jumped off the fence on the bearish side of things. We’ll see how this develops over the next few days.

 

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As NTES falters, Weibo (WB) has sprung back to life in classic Ugly Duckling fashion to rejoin the Gilmo China Five. This sort of recovery also has the look of a typical “LUie” formation as the stock posted a low-base range breakout today on strong buying volume.

This sort of occurrence is getting so common in this market that one can almost expect it to occur just as things start to look their ugliest. Last week WB was looking like it was primed to test the 200-day moving average, but a reversal on Monday set up a sort of moving average undercut & rally move (MAU&R) that becomes buyable at the line.

That approach would have worked well as the stock has pushed back up toward its prior highs. I suppose I could call this action “strange,” but in this market, stranger things have become commonplace as the Ugly Duckling often rules the action. So now what? Well, I would look for pullbacks to the top of the prior base range at 51-52 as possible lower-risk entries.

 

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More notes on the remaining China Five names:

Alibaba (BABA) posted a higher high today on below-average volume. However, pullbacks to the 20-dema have remained your best, lower-risk entry points, so this is what you want to be on the lookout for with BABA instead of chasing upside strength.

JD.com (JD) is holding tight just above its 10-day moving average. This puts it in a lower-risk entry position using the 10-day line at 31.27 as a tight selling guide. Note that JD was best bought on the undercut and rally move of last Wednesday as discussed in my report of the same day.

Momo (MOMO) is holding tight at the 10-day line with volume coming in at below average. This puts it in a potentially lower-risk entry position using the 10-day line as a tight selling guide, although my preference would be to look for any kind of opportunistic pullback to the 20-dema at 32 as an even lower-risk entry point.

Splunk (SPLK) has been holding support along the 50-day line, and as I wrote over the weekend it was “in a lower-risk entry position using the 50-day line at 60.25 as a very tight selling guide.” Today SPLK finally made a move as it pocket pivoted back up through its 10-day and 20-day moving averages.

While the stock was best bought at the 50-day line on Monday, this pocket pivot today shifts the situation just a bit. It is now buyable on pullbacks to the 10-day line at 61.39 as lower-risk entry opportunities.

 

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Take-Two Interactive (TTWO) looks buyable here using the 10-day moving average at 58.06 as a tight selling guide. The stock has been basing for more than a month now, and today’s tight action showed “voodoo” volume levels of -44.6% below average. We can see that TTWO was actually buyable last week when it undercut the prior low in its base and then turned back to the upside. This set up a typical undercut & rally long set-up using the prior low at 56.79 as a tight selling guide.

Now it becomes buyable again based on the voodoo action at the confluence of the 10-day and 20-day moving averages, using those same moving averages as selling guides, or the 50-day moving average at 56.80 as a wider selling guide for those who prefer it.

 

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For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple, 20-day exponential, 50-day simple and 200-day simple moving average.

Notes on other names discussed on the long side in recent reports below. In most cases, you will see that these stocks found support at logical points in their charts:

Activision (ATVI) posted a pocket pivot at its 10-day moving average. The stock moved higher today, but is extended. Pullbacks to the 10-day line at 49.12 would represent lower-risk entries.

Arista Networks (ANET) is still extended. I would prefer to remain opportunistic and look for any kind of pullback to the 20-dema, now at 126.64, as a better entry spot.

Carnival Cruise Lines (CCL) is still somewhat extended. I prefer pullbacks to the 20-dema at 57.66 as the most opportunistic entries.

Checkpoint Software (CHKP) has pulled into the 10-day moving average with volume drying up sharply. This puts it in a lower-risk entry position using the 10-day line at 102.67 or the 20-dema at 101.64 as selling guides.

Electronic Arts (EA) is sitting right at its 20-dema where it is buyable using the 20-dema at 88.83 as your selling guide.

Lumentum Holdings (LITE) finally pulled back today after breaking out to new highs last Friday. Today it found support at the 10-day line and closed just below mid-range. Given how far the stock has traveled over the past two weeks after clearing the 50-day moving average, I would look to use pullbacks to the 10-day line at 51.48, or even the 20-dema at 49.74 as lower-risk entry opportunities.

Oclaro (OCLR) tried to move higher today but ran into some overhead resistance from its last failed breakout in February. Volume came in above average, so I would watch for a low-volume pullback into the 10-day line at 9.74 as a potentially lower-risk entry opportunity.

Royal Caribbean Cruise Lines (RCL) has pulled into its 10-day moving average with volume declining. This puts it in a buyable position using the 20-dema at 97.59 as your selling guide.

Square (SQ) has moved back up closer to the highs of its current one-month price range following its late-February buyable gap-up (BGU) move. However, it was best bought on the turn (an “MAU&R” to be precise) off the 20-dema on Monday. With the stock holding tight up here I would use any little pullback into the 10-day line at 16.96 as a lower-risk entry.

Symantec (SYMC) tested its 20-dema today and held before turning back to the upside and posting a new closing high. I prefer to buy this on pullbacks to the 20-dema when they occur. So far SYMC is holding tight sideways in a constructive base over the past 2-3 weeks.

Veeva Systems (VEEV) remains extended. Based on this, I would only look to take shares in opportunistic on any potential pullback to the 20-dema at 48.14, should that occur.

Overall, on the long side, I think that remaining focused on the names that I’ve been discussing in recent reports has presented a reasonable working buy watch list. In this market, it’s helpful to be able to focus on a finite number of leading stocks, which keeps things much simpler during crazy days like Monday.

With WB rallying its way back onto my LONG watch list and off my SHORT watch list, I begin to keep an eye on other short-sale targets where a similar development might occur. Here we can see that Salesforce.com (CRM), which had previously been stuck below its 20-day moving average, bounce off the 50-day line on Monday and has now rallied back above the 20-dema.

What is interesting to note here is that on Monday as CRM bounced off its 50-day moving average it was also undercutting and rallying back above the prior 80.69 low of late February. So, this played out as a typical U&R move, and now the stock is back above the 20-dema.

This is my take on how to play this right here: consider the stock buyable using the 20-dema as a tight selling guide. If it doesn’t hold, then the stock could morph back into a short-sale target. Keep in mind, however, that after the sharp move off the late December lows, this current action could simply be part of a new base-building process.

 

GR032917-CRM

 

Alaska Air Group (ALK) made it tough for short-sellers trying to hit the stock at the 50-day line yesterday. Instead of reversing, the stock kept going, finally posting a pocket pivot coming up through the 50-day moving average by the close!

Normally, if I’m shorting a stock at a moving average like the 50-day line and it instead posts a pocket pivot, I just leave the stock alone. But in this market things are not always what they seem, and ALK simply gave up on yesterday’s pocket pivot by reversing back below the line on lighter, but just barely above-average, volume. This can probably still be treated as a short on any tepid rally back up into the 50-day line from here, so that might be something to watch for.

 

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Diamondback Energy (FANG) is back at its 50-day moving average on news of declining oil stockpiles. This could be considered shortable here using the 50-day moving average at 103.16 as a tight upside stop. FANG has been zig-zagging between its 50-day and 200-day moving averages for most of March, so it will be interesting to see if and how it can break free of the confinement of this current back-and-forth price range.

 

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Notes on other short-sale targets discussed in recent reports:

GrubHub (GRUB) remains shortable on rallies into the 10-day moving average at 33.97. It has consistently run into resistance at the line over the past six trading days, so I would also use that as a tight guide for an upside stop.

U.S. Steel (X) is out of position for any kind of short-sale entry. For now, this just remains on my short-sale watch list, looking for rallies up into either the 10-day or 20-day moving averages as potential short-sale entry points.

I’d have to say that Monday’s action struck me as something of a manipulation.  The futures were down big Sunday evening and this led to a big gap-down open on Monday. But it quickly became apparent that sellers weren’t swarming the market. At that point one had to be looking through their long watch list for names that might be finding support at logical points within their charts.

That would have been the cold-blooded thing to do, but an odd gap-down with everything bleeding red at the open can make that difficult to do from a psychological perspective. This is precisely what can make this market difficult at key junctures and inflection points. That’s what Monday turned out to be as the NASDAQ Composite and the S&P 500 indexes have now regained their 10-day moving averages.

Perhaps the market will continue to chop around as it awaits clarity on the rest of the Trump agenda. This includes, most importantly, potential tax reform legislation, which would be a big positive for the market as I see it. If this is the case, then the best recipe for staying out of trouble is by looking to buy into constructive weakness rather than chasing strength.

Finding your entry points lower within a stock’s chart pattern will help greatly when it comes to having a better average-cost on one’s long positions. This in turn enables one to keep their head (or at least try to!) when things get gnarly like they did on Monday and start to pull back. This is a tough market, even though we can still consider the market rally to be intact, at least for now. In light of this, I will expand my closing comments to the following: learn to think like an algo, keep the Ugly Duckling close to your heart, and watch your stocks! That is all.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in SNAP, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.